CNBC has revised their Option Action show which is aired every weekday night at 5:30. They have really beefed up the Friday show to the point that we think it is one of the best option oriented shows on the air. Check it out.
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Nasdaq Higher For Fifth Straight Week
Debt ceiling negotiations left the major averages mixed for most of the week before word of an imminent deal on Friday closed out the week on a high note. No deal kept the DJIA on a five-day losing streak before Friday’s upbeat session, but the NASDAQ was able to snap out of the doldrums earlier in the week after chipmaker Nvidia (NVDA) reported blowout quarterly earnings and raised guidance on surging AI demand. The stock soared +24.37% on Thursday boosting the Philadelphia Semiconductor Index by +6.81%. Other related artificial intelligence stocks, including Microsoft (MSFT), Meta Platforms (META), Alphabet (GOOGL) and Broadcom (AVGO) rallied to new 52-week highs on the report lifting the NASDAQ to its highest level since August 2022. The gains were limited to a narrow group of stocks however, as only Technology (XLK) , Communication Services (XLC) and Consumer Discretionary (XLY) sectors were able to post positive during the period. Every other sector closed lower led down by weakness in Consumer Staples (XLP), Materials (XLB), Utilities (XLU), and Healthcare (XLV). Yields moved higher on concerns that the US could default on obligations and stronger than expected economic data that showed a resilient economy that might avoid a recession. However, strong jobs and another increase in Personal Consumption Expenditures (PCE), the Fed’s favored inflation gauge, showed inflation remained sticky and far above the Federal Reserve’s intended target. Yields rose to a three-month high with the 10-year Treasury rate increasing to 3.806% and the two-year T-Bill hitting 4.564%. Crude oil prices were little changed hovering around $72 a barrel on demand concerns after Germany announced that it had entered a recession and China’s reopening seemed to lose momentum. Despite Friday’s surge, the major averages finished the week mixed, though the NASDAQ extended its weekly win streak to five.
For the period, the DJIA lost 333.29 points (-0.9%) and settled at 33093.34. The S&P 500 added 13.47 points (+0.3%) and closed at 4205.45. The NASDAQ jumped 317.79 points (+2.5%) finishing at 12975.69, while the small cap Russell 2000 eased 0.70 points(-0.0%) finishing at 1773.02.
Market Outlook:The technical condition of the market deteriorated this week as the major averages closed the period mixed on negative underlying breadth. The technical indicators for the DJIA are bearish, but the index reclaimed support at its 200-day MA and closed Friday oversold. The technical condition for the S&P 500 is neutral as it continues to struggle at the 4200 level, though momentum, as measured by the 14-day RSI, is rising. The bellwether index has also been putting in higher lows on its chart, a bullish condition. The technical condition of the NASDAQ is bullish as it approaches the high from August 2022, but the rally isn’t confirmed by underlying breadth as the gains continue to come from a narrowing, small group of big cap tech stocks.
The DJ Transportation Index and the small cap Russell 2000 continue to show negative divergence and finished the period lower and below key MA resistance levels. The transports struggled below its 200-day MA, as did the small cap index, but the Russell 2000 was able to cross above its declining 50-day MA on Friday. Positive divergence, however, was seen in the Philadelphia Semiconductor Index as it soared +7.2%, on top of a +7.8% spike the prior week, finishing overbought and giving another mixed signal.
As mentioned, underlying breadth was negative and did not confirm the increase in prices. The NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, drifted lower showing the majority of stocks remain under distribution. New 52-week lows continue to outnumber the new highs on the NYSE and NASDAQ pointing to a narrow group of stocks, in this case big cap tech, leading the market higher and expanded going into Friday. This negative divergence in market breadth is another red flag going forward. Investor sentiment remains neutral but there was an uptick in bullishness in both retail and the professionals. The American Association of Individual Investors (AAII) survey shows retail bulls increased to 27.4% from 22.9% the prior week, but still fall below the bears at 39.7%. The National Association of Active Investment Managers (NAAIM) Exposure Index saw the professionals increase equities to 65.5% from 59% prior.
A chart of these indicators can be found by going to the Market Edge Home page and clicking on Market Recap, which is on the right-hand side of the page just below the Second Opinion Status numbers.
Cyclical Trend Index (CTI): The underlying premise of the CTI is that the market, as measured by the Dow Jones Industrial Average (DJIA), tends to move in cycles that often resemble sine waves. There are five identifiable cycles, each with different time durations at work in the market at all times.
Currently, the CTI is Negative at -1, unchanged from the previous week. Cycles A, B and D are bullish, while Cycles C and E are bearish. The CTI is projected to remain in a negative configuration into July.
Momentum Index (MI): The market’s momentum is measured by comparing the strength or weakness of several broad market indexes to the DJIA. Readings of -4 and lower are regarded as bearish since it is an indication that a majority of the broader based market indexes are weaker than the DJIA on a percentage basis. Conversely, readings of +4 or higher are regarded as bullish.
The Momentum Index is Neutral at -2, unchanged from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 796 units while the number of new 52-week lows exceeded the number of new highs on four sessions. Breadth was also negative at the NASDAQ as the A/D line dropped 322 units while the number of new lows out did the new highs on three of the five sessions. Finally, the percentage of stocks above their 50-day moving average dropped to 35.6% vs. 49.4% the previous week, while those above their 200-day moving average fell to 39.0% vs. 45.3%. Readings above 70.0% denote an overbought condition, while below 20% is bullish.
Sentiment Index (SI): Measuring the market’s Bullish or Bearish sentiment is important when attempting to determine the market’s future direction. Market Edge tracks thirteen technical indicators listed below that measure excessive bullish or bearish sentiment conditions prevalent in the market. The Sentiment Index is Neutral at +1, unchanged from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 5/24/23 shows outflows of $513 million.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bearish as of the week ending 5/26/2023 (DJIA ñ 33093.34).
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